Moore Stephens (A firm) v Stone & Rolls Ltd (in liquidation) [2008] EWCA Civ 644

Stone & Rolls (S&R) commenced a claim against its auditors Moore Stephens (MS). The essence of the claim was that MS failed to detect the dishonest behaviour of Mr Stojevic who was at all material times, the sole directing mind and will of S&R. As a result of the frauds, successful claims were brought against S&R by certain banks. S&R was put into liquidation by the banks and the liquidator sought a recovery against MS.

MS applied to strike out S&R’s claim on the basis that S&R’s claim was barred on the ex turpi causa non oritur actio maxim; that a claimant cannot establish a cause of action based on its own illegal acts. The judge declined to strike out the claim at first instance.

MS appealed. There was no question as to the facts, Mr Stojevic was fraudulent and the directing mind and will of S&R. The appeal, therefore, concerned the following questions of law:

(i) whether the ex turpi causa maxim prevented S&R from suing for recovery in respect of its losses caused by an individual who was the directing mind and will of S&R (or more specifically, was S&R a victim of the fraud or should Mr Stojevic’s knowledge of the fraud be attributed to S&R) and,

(ii) whether the maxim provided a defence at all when detection of the fraud was the “very thing” that MS was engaged to do.

In respect of the first question, the Court of Appeal considered the Hampshire Land principle; that a company will not have attributed to it the knowledge of a fraud which is being practised on itself. The Court of Appeal decided that the Hampshire Land principle did not apply because S&R was not a victim - it was itself the fraudster. Therefore the maxim applied.

In respect of the second question, the Court of Appeal found that there was no previous judicial support for the argument that if the “very thing” from which a defendant owes a duty to save the claimant from, is, or includes, the commission of a criminal offence, the ex turpi causa principle will be overridden. There was no discretion for the court in the matter and the claim failed on the ex turpi causa maxim.